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Borrowers rely on a bank's valuation at their peril

In a recent case granting summary judgment against the claimant guarantors, the High Court refused to extend the duties owed by banks to borrowers in a commercial lending context.

The alleged duties in Rehman and another v Santander UK plc and another [2018] EWHC 748 (QB) centred on valuation reports obtained by Santander when deciding whether to grant a loan.

Background

In 2011, Rosewood Care Services Ltd (the borrower) approached Santander to refinance two nursing homes. They agreed heads of terms including the standard requirement that a satisfactory valuation of the properties offered as security be obtained. Personal guarantees from the promoters of the borrower were also a condition of the loan.

BNP Paribas Real Estate (BNPRE) was instructed by Santander to provide the valuations. In both its letter of engagement and the valuation report, BNPRE stated that its report was addressed to Santander, was for Santander’s use only and that it was not to be disclosed or relied on by any third party (with no responsibility accepted to any third parties) without BNPRE's prior consent.

BNPRE’s report confirmed a market value in excess of the minimum required by Santander. Santander confirmed this to the borrower's advisor by email and also provided them with a copy of the report.

In 2013, the borrower defaulted and was placed into administration. After the sale of the nursing homes, Santander demanded repayment under the guarantees.

The alleged duties owed

The guarantors issued a claim for relief, alleging that Santander:

owed a duty of care to ensure that the valuations were undertaken "by a competent valuer who was a specialist in the … sector and who had the necessary expertise and experience" and had negligently breached this duty by instructing BNPRE (the Negligence Claim);

impliedly misrepresented or negligently misstated that the valuations were a true and fair estimate of the nursing homes' market value; that the nursing homes and the underlying business provided adequate security for the loan; and that the borrower/guarantors could rely on the valuations without needing to obtain their own independent ones (the Misrepresentation Claim); and

was a fiduciary and, in breach of its fiduciary duty, failed to advise the borrower/guarantors to obtain their own independent valuations (the Fiduciary Duty Claim).

The decision

The court rejected all of the alleged duties.

In relation to the Negligence Claim, it found that obtaining a valuation when deciding whether or not to advance a loan did not establish a duty of care on the bank to ensure that the property was properly valued. This was the case even though Santander had made the reports available to the borrower.

In these circumstances, it was clear that the reports had been obtained for the bank's sole benefit. Further, a bank – particularly in the context of commercial lending – does not assume any duty to its customer when examining the details of a project for its own prudent lending purposes. The court said: “If the borrower chooses to draw comfort from the bank’s agreement to make the loan, that is the borrower’s affair”.

In relation to the Misrepresentation Claim, the court held that it was not reasonable in these circumstances for the guarantors to assume that Santander was representing the accuracy or otherwise of the valuation. Santander simply passed on the valuation figure provided by BNPRE, which did not give rise to any representation.

The Fiduciary Claim was dismissed because, irrespective of whether the borrower/guarantors placed trust and confidence in the bank's relationship manager or not, a fiduciary relationship does not arise in the commercial setting between banker and customer. A fiduciary relationship could only arise if it was reasonable to expect Santander to subordinate its interest to those of the borrower/guarantors and there was no evidence from which to reach such an inference.

Commentary

This case is another example of a party seeking to pass losses on to others by seeking to extend the boundaries of what duties are traditionally owed.

It is worth noting that the Rehmans had also issued a negligence claim against BNPRE. Leaving aside the question of negligence, this claim was always going to run into difficulties in light of the clear terms agreed between BNPRE and Santander and also the decisions in Smith v Bush and Scullion v Bank of Scotland (in both cases the courts having held that borrowers in a commercial context cannot rely on valuations commissioned by lenders and should obtain their own reports). The court dismissed the Rehmans' claim against BNPRE on this basis, ruling that there were no grounds on which to hold that BNPRE knew and accepted that they would rely on its report.

Even though the borrower/guarantors could show a direct relationship with Santander, the court's rejection of its alleged duties can be viewed in light of the hurdles faced in pursuing the claim against BNPRE. The rejection of such allegations shows that the courts are reluctant to extend the duties owed by banks without clear and evidenced reasons to do so.

Compare jurisdictions: Arbitration

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